NEW YORK--(BUSINESS WIRE)--
Fitch Ratings assigns an 'AA-' rating to the following Monroe County NY Industrial Development Authority (IDA) bonds:
--$101,000,000 school facility revenue bonds (Rochester schools modernization project), series 2013.
The bonds are expected to price via negotiation the week of May 27. Proceeds will finance a portion of Phase 1 of Rochester City School District's (the district) modernization project.
Additionally, Fitch affirms its rating on $124,100,000 school facility revenue bonds (Rochester schools modernization project), series 2012A and 2012B.
The Rating Outlook is Positive, which is consistent with the Outlook on the state of New York's general obligation (GO) and GO-linked debt. Fitch plans to review New York's GO bond rating shortly, following completion of analysis of the state's fiscal 2013 results and adopted budget for fiscal 2014.
The bonds are secured solely by state aid revenues annually appropriated to the district by the state of New York and remitted to the district from the period Dec. 1 through Mar. 31 (the collection period).
The funds are subject to appropriation as lease payments by the district and the district's budget is subject to approval by the city of Rochester. Lease rental payments are not subject to offset, counterclaim, or reduction. The district's general obligation (GO) is not pledged.
In the event that the district fails to appropriate state aid sufficient to cover debt service payments by Nov. 10, state aid sufficient to cover the subsequent principal and two interest payments will be intercepted and forwarded to the trustee. As intercepted state aid is not subject to appropriation by the district, this provision effectively removes the risk to bondholders of non-appropriation by the district.
KEY RATING DRIVERS
RATING BASED ON STATE INTERCEPT: The rating, one notch below the State of New York's 'AA' general obligation (GO) bond rating, reflects the state aid intercept security for the bonds.
STATE AID SET-ASIDE: Bondholders benefit from remittance of state aid to a depository fund from which debt service is set aside before flowing to the district and, in the event of a failure to appropriate, a state aid intercept structure that provides for pre-default payment.
STRONG COVERAGE: Interceptable state aid provides strong coverage of maximum annual debt service (MADS) on the current issue and on total authorized borrowing. Fitch believes that coverage from state aid may decline in the coming years due to the district's extensive capital and borrowing plans, charter school competition and declining enrollment; however, Fitch expects coverage levels to remain strong.
GENERAL STATE CREDIT QUALITY: The Positive Outlook reflects Fitch's Positive Outlook on the state's GO and related debt.
CHANGE IN NEW YORK'S GO RATING: This rating is sensitive to a change in the state's GO rating or Outlook, to which these bonds are linked.
MATERIAL WEAKENING IN COVERAGE LEVELS: The rating assumes continued strong coverage of debt service by interceptable state aid.
The New York state legislature enacted Chapter 416 of the Laws of 2007 (Rochester Schools Act), which authorizes the current transaction, to encourage the city and district to renovate its public schools. Capital improvement plans currently authorized under the Rochester Schools Act call for renovations of $325 million from 2012 to 2014, substantially all of which is expected to be debt financed. The district estimates total modernization costs at approximately $1.3 billion, the sum of which is expected to be financed under the program, subject to state legislative approval.
The school district is governed by an independently elected board of education. The city council approves the district's budget and levies taxes on its behalf but does not otherwise exercise direct control over the district.
STRONG COVERAGE BY STATE AID
State aid is remitted monthly and unevenly and is collected first by a state aid depository fund from which debt service is set aside; the remaining funds are forwarded to the district. In the event of non-appropriation by the district, state aid is intercepted and paid directly to the trustee in advance of debt service payments, the mechanism on which Fitch bases its 'AA-' rating.
Approximately 59% of interceptable state aid was remitted during the collection period in fiscal 2013, which covered estimated series 2012 and 2013 MADS 20.4 times (x) and anticipated MADS for all currently authorized borrowing of $325 million approximately 8.8x. Modernization projects are anticipated to be approved for state building aid which has historically covered approximately 90% of project costs, in which case coverage will remain very strong.
State aid to the district has rebounded, up 10% in 2012 and projected to increase 7.5% for 2013. The district is budgeting a 3.9% increase for 2014.
SENIOR RISKS TO INTERCEPT COVERAGE
State aid may be intercepted if the district is late in making charter school payments and for outstanding state aid revenue anticipation notes (RANs). Both payments have a senior claim to district bonds on state set-asides and intercepted funds. The district does not have RANs outstanding and last borrowed for cash-flow purposes in fiscal 2005. Further, the district has approximately $171.8 million in outstanding general obligation debt that is subject to post-default state aid intercept.
RISK OF LATE STATE BUDGET MITIGATED BY COLLECTION PERIOD
Fitch believes that the timing of the collection period for the bonds mitigates risks associated with the possibility of late state budget adoption; the state's fiscal year starts April 1. Historically, the state has been up to four and a half months late in adopting a budget, although the state has been on time in adopting its annual budget for the past three fiscal years. Moreover, the risk of historical and potential delays in state aid payments during times of state budgetary and cash flow pressure is mitigated by the very high coverage levels.
DECLINING DISTRICT ENROLLMENT AND CHARTER SCHOOL COMPETITION
Fitch believes that declining district enrollment and charter school competition may negatively affect the amount of state aid revenue in future. The district has experienced a 15.9% enrollment decline since 2002, to an estimated 29,523 as of May 1, 2013, faster than the city's population loss of approximately 4% over the same period. The district is projecting an additional 1,500 student enrollment decline over the next five years.
Eight charter schools operate within the district, two of which opened in 2012-13. These independently operated schools educate 2,709 pupils (8.4% of district and charter enrollees). Charter school enrollment has increased by 39% since 2004 and is projected to increase a further 16% for 2013-14, to an estimated 3,160 for 2013-14. All charter schools receive state-set per-pupil aid which passes through the district; the district estimates $40.1 million in charter school payments for fiscal 2014. Further, in 2010 the state legislature increased the state-wide number of charter schools permitted, which may result in a further increase in the number of charter schools operating within and competing with the district. Nevertheless, Fitch expects coverage levels to remain solid because coverage is high and new debt will be supported by building aid.
For more information on the state's GO rating, see Fitch's press release 'Fitch Rates $548MM New York State GO Bonds 'AA'; Outlook Positive' dated March 5, 2013, available on the Fitch web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'Fitch Rates $548MM New York State GO Bonds 'AA'; Outlook Positive' (March 5, 2013).
--'Rating Guidelines for State Credit Enhancement Programs', (April 18, 2013).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Rating Guidelines for State Credit Enhancement Programs
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Tertiary Analyst (State of New York)
Elizabeth Fogerty, +1-212-908-0526 (New York)